Estimation of permanent and transitory response functions in panel data: a dynamic labor supply
Emphasizes dynamic aspects of the labor supply decision, especially the distinction between responses of annual hours worked to long-run and to short-run changes in wage rates. The model assumes that log real average hourly wage rates are predetermined by market conditions and include permanent individual wage differences, as well as a serially correlated transitory component of variation. Log annual hours of work are determined by a long-run labor supply response to the permanent wage and a short-run response to the transitory wage variation. Given the parameters of the dynamic model, one can easily analyze the role of wages, labor supply, and exogenous hours variation in the distribution of log real annual earnings over time.